Wednesday, 29 August 2012

The problems with taxing wealth

The beast is hungry:

In an interview with the Guardian newspaper, Mr Clegg appeared to highlight differences over fiscal policy, by suggesting the government could go beyond his own Liberal Democrats' current policy for a "mansion tax" on properties of a high value.

He said: "In addition to our standing policy on things like the mansion tax, is there a time-limited contribution you can ask in some way or another from people of considerable wealth so they feel they are making a contribution to the national effort?" he said.

Whilst it is a big Lefty wank fantasy to be able steal a chunk of what someone has accumulated during their lifetime, the reality is wrought with problems:

1. Liquidity - my wealth, if you can call it that, consists of the shares I own in my business, my pension fund, and housing equity. I don't have any cash - really, I'm virtually penniless but I have assets. The problem is with these assets are that they are illiquid and I'm not going to be able to realise cash from them in a hurry to pay a wealth tax. People don't tend to have large amounts of cash sitting around because it could be generating a better return elsewhere, be it in property, classic cars, yachts, fine art, shares, gold, business ventures, or whatever.

2. Wealth creates income - the shares in my business (hopefully) give me an income in the form of dividends. My pension fund will also give me an income when I retire. So taking away some of this wealth now reduces my income now and in the future and with it, any tax that would be due on it. 

3. Stability - arbitrary tax grabs to pay for gross government profligacy are a massive disincentive for investment in this country. If the government does it once then they will undoubtedly do it again and again. No one is going to want to set up shop here if they believe they'll end up as a piggy bank for the government to raid at will.

In short, you're going to struggle to generate significant amounts of tax revenue from wealth without hitting future revenues and investment. This is short-termism at its worst. Fuck off Clegg.

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